LUXURY: FINE WINE – The finishing wines

Although the world’s top wines possess enviable global luxury status, they are nonetheless highly susceptible to changing fortunes. Since last year some brands continue to race ahead, while others lag behind, writes Patrick Schmitt

Wine doesn’t do global brands. You’ve almost certainly heard this refrain before – probably read it in this magazine. And it’s certainly a fair and common criticism of the mainstream wine trade when compared to its counterparts in beer and spirits. The likes of Jacob’s Creek or Gallo are influential, but hardly have the global spread, recognition and profit margins of Johnnie Walker or Budweiser. However, look, as this list does, at the fine wine trade, and one is faced with a collection of truly global, luxury brands that any industry would like to call its own. These are products fixed in supply and susceptible to the vagaries of weather, but renown worldwide for the quality of their crafting and lusted after for the status they confer. Not only that, but they attract the attention of the speculative investor as much as the desires of the hedonistic and super rich consumer.

Nevertheless, these leading labels suffer year on year changing fortunes, and this year we take a second, and therefore comparative, critical look at the highest performing fine wines in the market.

Five firsts and Ausone
And once again, Lafite has topped the chart. As Simon Staples, sales director at Berry Bros & Rudd says, “If you are to back a horse in a race, you’ve got to back Lafite.” Similarly, Gary Boom, partner at the Vintage Wine Fund, is first to state his firm opinion that Lafite leads the way. “It is stellar,” he says of its price and performance, “and every single vintage.” For instance, James Miles, founding director of fine wine exchange Liv-ex, records that Lafite ‘82 has increased in price six fold since 1999. “It was around £3,000 a case and now it is nearly £17,000.”

Why, what marks out this one wine among the first growths in Bordeaux? After all, not only is Lafite number one, but, since last year, it has extended its lead on second place Latour. “It is because the demand in the Far East for Lafite is phenomenal – it is the first growth of choice, in particular in the Chinese market, where the demand is insatiable,” explains Boom.

He also notes that although Lafite “is making better wine”, its performance is more a reflection of the strength of the brand than the superiority of what’s in the bottle. And hence a particularly noticeable phenomenon this year: Lafite’s unshakeable desirability has boosted its second wine – Carruades – which has risen five places to 23 in the Liv-ex list, despite its lacklustre Parker ratings. “Carruades de Lafite in 2006 was one of the most demanded wines,” records Staples, “but it was also one of the poorest.”

As Miles points out, and see the list for evidence, “When it comes to average scores, Carruades came 140th, and that’s out of 168 brands we traded in the last 12 months, so it is at the low end. But it was the best performing in terms of price appreciation and ninth best in trade on Liv-ex.”

Latour’s brand power has had a similar impact on second wine Forts de Latour, which has leapt onto the list at 17th place. This high ranking, like Carruades, Miles ascribes to an entirely Asian phenomenon. “They see these wines as cheap alternatives to the big wines [grands vins] and they are chasing the price, rather than the quality.”

In any case, and as a direct result, in total, the Lafite house accounts for nearly 16% of the business done through Liv-ex – a significant lead on Latour, which, despite its second place position, makes up 6% of the trade on Livex if you combine the first and second wine.

Next, and up two places this year, is Ausone, which Miles describes as “the new Pétrus”. “The wine has been massively re-rated and since 2003 it has gone nuts. It is a qualitative thing and because the wine is made in such small quantities it has caught people’s imagination. As a result it has gone from a £2,000-£3,000 per case wine to a £15,000 one.”

As for Margaux, Miles is “surprised to see it is our third most traded wine [on Liv-ex], and it always feels like there is less Margaux around”. However, as a fine wine brand, relative to the other leading first growths, Margaux, “hasn’t caught the imaginations of buyers in Europe and Asia, the drivers of the market”, he reports. Similarly, Boom believes, “Margaux is stuck in the doldrums, it has not caught on in the Far East although there is a fair amount of demand in the US.”

In fifth place, up two, is Mouton Rothschild. “This is an interesting one,” says Miles, “and a wine we’ve been tipping, and our top wine in terms of trade on Liv-ex.” As Boom adds, “Its 2006 was the strongest since ‘86/’82 and generated a fair amount of interest in the brand from the Russian market, and there is a comeback in the Mouton Rothschild label in the Far East – which is driving these markets.” The increased trade could be explained by the fact Mouton has been undervalued relative to other first growths. “If you take Lafite ‘82 and Mouton ‘82, which are both 100-point wines, traditionally Mouton was traded at a 10% premium to Lafite – Mouton was seen as the superior wine,” explains Miles. “But now Lafite is twice the price, and it is seen as the superior 100-point wine.”

In short, Mouton ‘82 has been “absurdly cheap relative to Lafite and the big runs we’ve seen on Mouton are purely because it is underpriced – if you’ve got to have a first growth on the table and can have Mouton Rothschild for half price, why not?” In other words, the increase in trade is due to a combination of speculation and consumption.

Finally, last of the first growths, Haut-Brion, has held its position compared to last year, but suffers relative to the others because as Boom says, “It never really established itself in the Far East.” However, Mission Haut-Brion has shot up nine places. “It has been a huge success with the 2005 and 2006 vintages being particularly good wines,” says Miles, adding, “These have been doing a lot of business and it is our eighth most traded wine; there is a big demand.”

Best of rest
Scanning through the rest of the top 50 fine wine brands there are a number of notable performers, either because of their rising scores or falling positions. To begin, Pétrus at eighth place is down four, and Miles says the wine has “gone a bit quiet” in terms of trade. “At £20,000-£30,000 a case it has gone as far as it can go and we are seeing less of it – quite simply, it has become rarer.” Also suffering from scarcity is DRC (Domaine de la Romanée-Conti), and hence its two-place fall. “It is so rare to see full cases, but it has done very well,” notes Miles, “and in our Fantasy Cellar (page 96) DRC La Tache ‘96 is one of the best performing wines.”

Similarly, Staples at Berry Bros says the wines are “almost impossible to find, but DRC is just off the scale – a full case of any of the DRC assortment is worth 50% more than last year”.

Penfolds Grange, up 12 places, is perhaps a surprise. However, with relatively high production and price, and continued support from Parker, and a series of great wines since 2000, its rise up the charts is understandable.

As for superseconds such as Palmer, Cos d’Estournel, Ducru-Beaucaillou and Pichon-Lalande, positions in each case are on the slide. Boom says of Pichon-Lalande in particular that “it used to be half the price of a first growth but now it is around one third, so it’s looking good value”. Staples at Berry Bros even believes this Bordeaux sub-category could be in trouble. “They don’t have the aspirational attributes of the first growths, which have gone into the distance, and there are fantastic and cheaper wines such as Pontet-Canet or Haut-Bailly.” And when it comes to your average fine wine drinker rather than speculator, Staples says “they don’t want to spend more than £50 on a bottle” and “people don’t buy these wines for speculative reasons”, adds Boom.

Interestingly, the top Rhône wines, such as Guigal and Clos des Papes are proving popular in terms of Liv-ex trade. Miles reports: “They have made some great wines and they do score very well. Parker seems to love them.” This has been helped by a string of excellent vintages.

Finally, “Gaja has taken a hammering,” says Miles. This could be because “Italian wines are out of fashion. They got too expensive and they are difficult to sell, in particular because of the weakness of the dollar – there used to be a big market in the US.”

Finally…
Overall, investment in fine wine is increasingly concentrated on the first growths, with 46% of the trade on Liv-ex in the last year attributable to these five famous labels alone. Their brand power is a result of both price and production – “they have more wine than anyone in Bordeaux and they sell at £4,000 a case”. Critical to their future success is demand from markets such as the Far East and Russia, because ultimately these wines must be drunk to justify rising prices, and it is in these places where the corks are actually being pulled.

“You see hardly anyone buying from the Far East and storing in London,” says Boom. “100% of the 2000 vintage downwards are going out there to be drunk.”

Similarly, Staples notes that “Fine wine as an investment wouldn’t work if there wasn’t an end consumer and there is huge consumption in Russia and China.” These countries “don’t buy into the en primeur concept yet… they are buying ready-to-drink at ridiculous prices”.

And what about the threat of a global slowdown? “If China’s growth rate slowed to 0% then there would be an effect but the likes of Shangri La are building a new hotel every month in China and each time one opens there are new wine orders, and then there are the new casinos in Macau,” says Boom of one of the most dynamic fine wine markets. “In London,” he continues, “this Christmas we will still see the second highest bonuses on record, not as big as last year, but there is still a lot of money that needs to go into the market.” This will fuel fine wine demand, if more for future consumption, than speculation – “buyers will set aside around £15,000 for wine at £200-£300 a bottle,” predicts Boom.

As for the rush of investors over the last year, “some are selling”, he adds, “but there is simply a transfer of fine wine to drinkers, and it is an orderly transfer.” Staples is similarly optimistic, recalling that “the credit crunch at the end of August did lead to a discernable slowdown… but that lasted about three weeks and the market has been romping ever since at all levels, but particularly the first growths.” Further, while the City is forecasting difficult times for early 2008, Staples makes the point “the super rich will be unaffected.”  

As for the 2007 vintage, “it is not going to be great and it will be expensive,” forecasts Boom, “but if anything that will increase the pressure on back vintages, which is a bullish aspect. Also, châteaux are releasing at higher prices because they can afford to sit on stock – they are owned by billionaires.” However, Boom adds, “I don’t think there will be a return for those investors who want to be in and out within six months.”

Similarly, Miles concludes, “The long term story hasn’t changed. Yes, there has been a reappraisal of risk, which is healthy. The Liv-ex 100 has fallen 4% since its peak [July 2007] and I wouldn’t be surprised if it fell another 5 or 6% over the next six months. But the old world socialist/communist countries are in the world economy which they weren’t five years ago and if anything the top châteaux are releasing less wine than they were a few years ago, which means the pressure on prices is only going to go up over the next 10-20 years.” In short, supply is fixed and demand is increasing. As they say, you do the maths.

© db December 2007